The Costs Of Medicaid Expansion Are Real And Often Much Larger Than Expected

The decision states face of whether to expand Medicaid to non-disabled, working-age, childless adults—the Affordable Care Act (ACA) primary expansion population— involves tradeoffs. These tradeoffs include higher taxes, reduced spending on items like education, transportation, or infrastructure, or reduced spending on other Medicaid populations such as the disabled, children, or the elderly. The ACA funding formula allows states to pass a much greater share of the costs of covering non-disabled childless adults to federal taxpayers, but the tradeoffs still exist.

In a previous piece, I argued that states could have expanded Medicaid to this population before the ACA and received their normal federal reimbursement rate, which on average covers about 60% of the bill. The decision of most states not do so was an indication that the costs of expansion to states exceeded corresponding benefits even when the federal government paid at least half the bill.

There is a large amount of evidence that suggests Medicaid is a poorly performing program that should be reformed and not expanded. Research last year by economists at MIT, Harvard, and Dartmouth found that enrollees receive just 20% to 40% of value for each dollar Medicaid spends on their behalf. Abundant prior research suggests that Medicaid has little beneficial effect on enrollees’ health and that enrollees tend to have poor access to a usual source of care, overutilize emergency rooms, and too often receive inferior care. Medicaid expansions are also associated with many people replacing private coverage with Medicaid.

As a result of Medicaid’s many problems, the decision facing states about whether to expand under the ACA is not nearly as simple as former Secretary of Health and Human Services (HHS) Kathleen Sebelius suggested when she referred to states refusing to expand as “morally repugnant and economically stupid.” If it were, far more than 30 states would have adopted the ACA’s Medicaid expansion because of the allure of “free” federal money and the enormous pressure from powerful special interest groups, particularly hospitals and insurers, to expand.

States Could Expand Medicaid to Non-Disabled, Childless Adults Before Obamacare

In order to participate in Medicaid and receive federal funding, states must cover certain populations and provide certain benefits. Prior to the ACA, the mandatory populations generally consisted of low-income children, pregnant women, people with disabilities, and lower-income seniors.

Prior to the ACA, states looking to expand Medicaid or Medicaid-like coverage to other populations, such as non-disabled, childless adults, utilized Section 1115 waivers. These waivers authorize the HHS Secretary to waive compliance with certain federal Medicaid requirements and provide federal funds for costs that would not otherwise be reimbursed. Section 1115 waivers are supposed to be budget neutral, meaning that federal spending under a waiver cannot exceed what federal spending would have been without the waiver.

In practice, the federal government often fails to ensure budget neutrality. The Government Accountability Office reported in 2013 that waivers initiated in four states exceeded estimated costs by a total of $32 billion. Among the problems, GAO found that HHS uses inappropriate baselines from which to measure spending without the waiver. For example, Arizona’s 1115 waiver to expand Medicaid last decade—discussed in more detail below—produced an explosion in both state and federal Medicaid expenditures.